Will the giants of housing finance become "green" giants?

Change does not come easily at the three large housing finance agencies - the Federal Housing Administration (FHA), Fannie Mae, and Freddie Mac.

But all three institutions, in their multifamily lending operations, have shown admirable willingness to adopt new policies to improve the energy efficiency of rental housing in America. With the announcement today of a new FHA policy, all three housing finance agencies offer mortgage loans that encourage owners and developers of apartment buildings to make their buildings more energy efficient. The beneficiaries of these policy improvements are the many residents who will enjoy lower monthly housing costs and potentially healthier homes.

Market trends are clear that energy efficiency is an important attribute of housing for consumers (see ULI Market Trends report for 2016). If a building is an "energy hog" the owner and the residents can expect high utility expenses. Will the property hold its value in a market with many new "green" apartments offering high quality appliances and low utility expenses?

FHA's newly announced policy will offer owners of apartment buildings a discount if the property meets certain efficiency requirements, including Energy Star standards. Energy Star is a performance measure, which means the property is in the top 25% in terms of energy use. The loan discount is a reduction (of 20 to 40 basis points) to the loan insurance fees paid to FHA. (For more detail, see the proposed rule here.)

This is a good policy. It will help both owners and residents of rental properties to make those properties more energy efficient. It is likely to help FHA by improving the properties in its loan portfolio. And, more efficient apartments helps utilities to pollute less. (How, you ask? The utility burns less fossil fuel when it does not need to deliver energy that will be wasted in a poorly insulated building.) This is good for the nation and the world.

FHA's announcement of a discount for energy efficient properties follows Fannie Mae's earlier Green Financing offering -- pricing breaks for high efficiency properties and (even better) a loan product with additional proceeds to finance repairs and improvements to make the property more energy efficient. (Read about Fannie Mae's Green Financing Solutions here.) Freddie Mac in 2015 announced a small rebate for high efficiency properties. (Read about the Green Rebate program here.)

There is more to do. Much more. Especially in the loan agencies' single-family mortgage operations. For two examples, see article here on how high efficiency houses can support "green bonds," and article here on the need to assure new houses meet minimum energy codes. But these recent developments are promising.

HUD Secretary Castro pointed out in the FHA announcement that half of all renters are overburdened by housing costs, with nearly a quarter paying more than half of their income on rent -- "Families across the country are struggling through an affordable housing crisis." Reducing utility expenses reduces the total cost of housing for these families.

NRDC has been working in 12 states on increasing energy efficiency in multifamily housing with the potential to cut electricity usage by as much as 26 percent. Over the last two years, working with a wide-ranging coalition of community-based, housing and environment groups, the Energy Efficiency for All project -- of which NRDC is a member, along with National Housing Trust, Energy Foundation and Elevate Energy -- has helped to secure millions more in funding for energy efficiency improvements in rental housing. Even with contributions and incentives from utilities and other sources, many building owners will need to finance a part of the cost of some projects, and products from the three major housing finance agencies help to support those investments.

We look forward to more creative work from the housing finance giants to help Americans invest to improve the quality of our housing stock.

About the Authors

Philip Henderson

Senior Financial Policy Specialist, Center for Market Innovation

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